Why not bankruptcy?

I was a strong supporter for Barack Obama for President, and am still extremely hopeful that he will bring the change we need right now in America; however, today I am finding myself in more agreement with some of the Republicans on current issues. Specifically on the economy.

The issue of the day is a bailout for the auto industry.* Led by Carl Levin this bailout is being pushed by the Michigan congressional delegation who are being squeezed by the auto executives and their union allies. These are the same people who crated the mess by lobbying against increased fuel efficiency standards while they sold gas gusseling SUVs, pickups and Hummers. They are now also in partnership with Wall Street big wigs like Cerberus Capital Management who have gambled billions and are likely to loose their investment unless the taxpayers bail them out. Like the war on Iraq, like the three-page $700 billion financially system bail out, the auto crisis is now being portrayed as an immediate and impending disaster that requires a bushel full of money without any debate. We have seen this movie before. What about the taxpayer? Why should the taxpayer bear the brunt of their mismanagement and incompetence? Why not utilize the existing market mechanisms to bring about the changes we need? Specifically, why not bankruptcy?

The framing of the argument used by Levin and his cohorts (remember Carl Levin was also a leader on the Senate Armed Services Committee when they pushed the authorization to use force that got us into the mess in Iraq so he knows how to make the argument) is that if the US automakers fail, then there will be a loss of three million jobs. This is a false argument. It is not an either/or choice. The choice is not to give them a loan or watch them go out of business. There is another choice and that is a bankruptcy reorganization under Chapter 11. Levin paints the possibility of a bankruptcy reorganization as if it means that they will shut down these companies. Not true! Lots of companies have been through bankruptcy and come out of it as stronger, leaner and more competitive operations. A bankruptcy reorganization would likely remove the existing management, restructure the financing by removing the current owners, and yes, perhaps closing some inefficient parts of their organizations.

So why not get rid of the existing management? They have already failed. They put these jobs in jeopardy with poor management decisions supported by overreaching union leadership that focused more on getting unrealistic benefit packages than the viability of the enterprises. They failed to engineer new fuel efficient vehicles while their competitors did so. They failed to modernize their plants while their competitors built new ones here in America. They chose to diversify into non-auto related businesses that squandered their resources into mortgage banking, computers, and data management. They don't have a restructuring plan now and all they can do is threaten disaster if they don't get a loan. I can just about guarantee you that they will be back for more because they don't intend to make any fundamental changes in their operations. This situation cries out for a new management team that will be willing to make changes in their organizational cultures, products and manufacturing practices. This needs to happen before they get a dime of taxpayer money.

Why not restructure the finances of these companies? In the past few years, the auto makers have attempted to deal with some of their financial woes by selling investors from the private equity market to gamble on them. Big shots with deep pockets decided to take a gamble. Cerberus bought 50% of GMAC which at the time was the crown jewel of GM because it made money and subsidized the inefficiencies of the parent GM auto company. Cerberus also bought 100% of Chrysler after the German auto maker, Daimler-Benz decided they they could not make this company work. Other large well know investors have been in and out of these stocks over the last few years trying to make a fast buck by playing the market. These gambles have not paid off. It is now time for these investors to pay the piper. A bankruptcy reorganization will essentially wipe out the current stockholders, and replace the ownership of the company with the creditors. This will lower the debt service for the companies while streamlining the capital structure, and eliminating the outside influence of a hedge fund that is not obligated to report its financial performance to the public.

Will bankruptcy result in some job losses. Absolutely. There are many inefficiencies in these organizations from the top to the bottom: product development, manufacturing and retail distribution. Will some manufacturing facilities need to be closed? Yes. Will some white collar jobs need to be eliminated? Yes. Will the unions need to make concessions? Perhaps. Will some dealers shut down? Perhaps that too. But you can't get leaner and meaner if you don't make some of these changes. Remember the definition of insanity: doing the same thing you are doing and expecting different results. Putting taxpayer dollars at risk without making changes is insane.

Is the auto industry a key factor in the economy? Absolutely. Should Congress and the public be concerned about the future of these companies? For sure. Should we try to save as many jobs as possible while making appropriate changes? Definitely. But making these changes is the only thing that makes sense before we taxpayers invest in these enterprises. And when we do, we should get preferred stock, just like we have done with the banks. Taxpayers should get paid back first when these companies recover.

For a campaign that was run on "change," it is time for the incoming administration to force the changes that are needed to turn these companies around. It may still not work, but not making any changes will just get us deeper into the hole. This will require a lot of courage, because the unions and the elected democratic officials from the Midwest supported Obama and are now calling in their chips. I hope the new administration will put America First and force the changes we need before we resort to business as usual and support the special interests. This is our first big chance to put America First!

*Also, by way of full disclsoure, I worked for a subsidary of GMAC for about 9 years up until a little over a year ago.